Buying a home can be one of the biggest investments you’ll ever make. For most people, it’s not feasible to pay for a house upfront, which is why mortgages are necessary. However, if you’re not able to pay at least a 20% down payment of the home’s purchase price, you’ll be required to take out mortgage insurance, which comes in the form of mortgage insurance premium (MIP). In this article, we’ll explain everything you need to know about mortgage insurance premium.
What is Mortgage Insurance Premium (MIP)?
Mortgage insurance premium, or MIP, is a type of insurance that protects the lender in case the borrower falls behind on their mortgage payments. This type of insurance is required by the Federal Housing Administration (FHA) when a borrower has a down payment of less than 20% of the home’s purchase price. The borrower is also required to pay monthly mortgage insurance premiums throughout the life of the loan.
It’s important to note that not all mortgages require MIP. Conventional loans, for example, require private mortgage insurance (PMI) if the borrower puts down less than 20%. However, the guidelines and regulations for MIP and PMI are different.
How is the MIP Calculated?
The amount of MIP you’ll be required to pay depends on several factors, including loan amount, loan term, and the loan-to-value ratio. The loan-to-value ratio is calculated by dividing the amount of the loan by the appraised value of the property. The MIP rate is typically higher for borrowers with a higher loan-to-value ratio.
The MIP can be calculated using the following formula:
MIP Rate |
Base Loan Amount |
Upfront MIP Rate |
1.75% |
Annual MIP Rate |
0.45% – 1.05% |
How is the MIP Charged?
The MIP is charged at two different periods: upfront and annually. The upfront MIP is usually rolled into the loan amount and paid off throughout the life of the loan. The annual MIP is calculated based on the outstanding loan balance and paid as part of the monthly mortgage payment. The annual MIP is recalculated each year based on the remaining loan balance and adjusted if necessary.
Types of Mortgage Insurance Premium
There are two types of mortgage insurance premium: upfront and annual. As mentioned earlier, the upfront MIP is rolled into the loan amount and the annual MIP is paid as part of the monthly mortgage payment.
Upfront Mortgage Insurance Premium (UFMIP)
The upfront mortgage insurance premium, or UFMIP, is a one-time fee required by the FHA at closing. The UFMIP is currently set at 1.75% of the base loan amount and is rolled into the loan amount. This means that the borrower is not required to pay the UFMIP upfront, but they will pay it throughout the life of the loan.
Annual Mortgage Insurance Premium (AMIP)
The annual mortgage insurance premium, or AMIP, is a monthly fee paid by the borrower as part of the monthly mortgage payment. The AMIP is recalculated annually based on the remaining loan balance and the loan-to-value ratio. The AMIP rate is currently set between 0.45% – 1.05% of the remaining loan balance.
FAQs
Do all mortgages require mortgage insurance premium?
No, not all mortgages require mortgage insurance premium. Conventional loans require private mortgage insurance if the borrower puts down less than 20% of the home’s purchase price.
How long do I have to pay mortgage insurance premium?
The length of time you’ll have to pay mortgage insurance premium depends on the type of mortgage you have. FHA loans require mortgage insurance premium for the life of the loan, while conventional loans require mortgage insurance until the borrower has paid down enough of the loan to allow them to have at least 20% equity in the home.
Can I get rid of mortgage insurance premium?
If you have an FHA loan, you’ll be required to pay mortgage insurance premium for the life of the loan. However, if you have a conventional loan, you can request to have the mortgage insurance removed once you have at least 20% equity in the home. This can be done by refinancing the loan or submitting a request to the lender.
Is mortgage insurance premium tax-deductible?
Yes, mortgage insurance premium is tax-deductible as long as your income is under a certain threshold. The tax deduction is set to expire at the end of 2021, but it has been extended before.
Conclusion
Mortgage insurance premium is a necessary expense for many homebuyers who are not able to put down at least 20% of the home’s purchase price. It’s important to understand how it works, how it’s calculated, and how long you’ll have to pay it. Understanding all the costs associated with homeownership can help you make informed decisions when it comes to buying a home.
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